A Time for Decisions

by John F. Infanger On Jun 3, 2005

SEATTLE - AAAE's No. 2 man Spencer Dickerson continues to insist that "security, security, security" remains perched as the top concern for U.S. airports today - from funding to installation to standards. If preliminary reports of an errant pilot violating D.C. airspace procedures indeed show that it was just a case of ignorance, Dickerson may be right. As though on script, the Cessna 150 was diverted to Frederick, MD - a plot, perhaps, by the Secret Service as a way of saying, ‘In your face, Phil Boyer and AOPA.' (AOPA is headquartered at the Frederick airport.) The script with how security and a host of other needs will be funded is not being written with any sort of urgency by Congress. Meanwhile, the sirens in the D.C. winds suggest it is time to rethink the entire aviation funding/taxation system.

Apparently, the security system in place broke down if a pilot, based not far from Washington, was ignorant of restrictions over the Capital airspace. The good news is the military's new book of procedures worked at detaining the aircraft. The Aircraft Owners & Pilots Association is surely alarmed that its educational efforts regarding security have not reached all pilots. The bad PR is another matter.

For airports, the educational effort is with the U.S. Congress, but the students aren't doing their homework. Comments Dickerson, vice president for the American Association of Airport Executives, "We've been telling [Congress] for some time now that there are significant savings to the TSA's personnel costs by going 100 percent in-line [baggage screening]."

The most immediate assignment is funding what Congress mandated for security in November, 2001 - most notably, as Dickerson indicates, getting Congress to finance the in-line baggage screening systems. However, the mood of 9/12 is not the mood of mid-2005.

Washington is not willing to throw money at security or aviation in general, it seems - although $3 billion for the Airport Improvement Program is a far cry from the days of $1.2 billion not long ago. Yet, it is still $500 million short of what the Vision 100 authorization legislation allows.

But the issues are larger. The discussion in Washington is quickly turning to one of reconsideration - of everything related to how the aviation system is funded, to that which it funds. That means rethinking ticket taxes, fuel taxes, even the Trust Fund itself. At the top of the heap sits the Federal Aviation Administration, which is in effect being largely funded via the Aviation Trust Fund, a purpose for which it was not originally intended. The agency recently invited industry and non-industry leaders to make recommendations on how to fund FAA and the system in the future.

Steve Van Beek, vice president with Airports Council International-North America, estimates that some 90 percent of U.S. airports have not found the financial resources to fund the explosives detection systems called for by Congress. "I've talked with large airports that don't want to do it because they're not willing to see the savings accrue to TSA; they are willing if they see the potential for being repaid [by the federal government]. Airports are willing to do it up front, but they need a pledge of some sort.

"This has been perhaps our biggest disappointment, because we can do something that we know saves money. Yet, there's little leadership on the Hill for funding it."

Meanwhile, revenues to airports and the industry in general, including the Trust Fund, are down because of the state of the airline industry. That fact alone is serving as a catalyst for a major rethinking of how the aviation system and FAA are funded. It's a significant discussion that is just beginning, as representatives in Washington, D.C. consider the next aviation reauthorization legislation, scheduled for FY2007.

Security, Opting Out

For airports, as Dickerson indicates, meeting the security requirements of Congress/TSA remains a high priority, not only in terms of financing screening systems but being able to reconfigure their terminals in such a way that facilitates passenger movement. For general and business aviation, meanwhile, concern over dramatic TSA oversight is diminishing, according to NATA president James Coyne, at least at non-commercial airports.

Comments Coyne, "I don't think it's going to be expanded toward general aviation airports in any substantive way. My guess is it will pretty much continue as is."

His perspective was reinforced in late May with the announcement that TSA was preparing guidelines for general aviation aircraft to allow them to access Ronald Reagan National Airport (DCA), which has been closed to GA since 9/11.

For airports, one of the carrots held out by TSA in June 2004 was the opt-out program, which was intended to motivate airports to assume passenger screening activities, either in-house or by way of contracting with private companies. To date, however, only two airports have raised their hands to participate in the opt-out program - Elko, NV, and Sioux Falls, SD.

Comments AAAE's Dickerson, "The appetite from our members for opt-out is very low. The problem is that the members aren't comfortable with the liability issues; they're uncomfortable with the accountability issues; who's responsible; are there going to be funds. Until they get those issues resolved, the appetite will not be high."

Adds ACI-NA's Van Beek, "Opt-out was an opportunity that would have been a way station to dip our toes into it and see if the big-time issues related to it would be taken care of. Opt-out was a narrow program, but TSA may take it further. "

Meanwhile, there is a growing concern in airport circles that in time the federal government will just hand over to airports the responsibility for all passenger and luggage screening. (See TSA sidebar, page 14.)

Airlines and Airports - A Financial Connection

No matter how stressed airports may be regarding funding security or managing day to day operations with reduced revenues, analysts on Wall Street such as Fitch Ratings service continue to remind airports that their financial situation is positive, relative to that of the air carriers. Yet, it is the carriers - bleeding red ink - who are the financial drivers of the system.

According to ACI-NA's Van Beek, the current situation is causing some airports to rethink their long-term economic strategies. "Two things have become apparent," he says. "One is, airlines are funding a lot less than they used to; and second, airports are trying to see their constituency as their communities and not the airlines.

"You can no longer say, what's good for US Airways is good for my community. As they invest in their airports, it forces them to find airport-centric solutions, not airline-centric solutions."

Charles Chambers, vice president of consulting firm InterVISTAS and the current chair of the Airport Consultants Council, agrees that the financial situation of the carriers is causing airports to rethink how they operate. "Airlines are already and will continue to agree to more common-use facilities at airports, despite their ongoing reluctance. Airports and third parties will assume responsibility for these common-use facilities."

The need to find new revenue sources is also leading some airports to consider offering airline services, such as ground handling or refueling, as a way to help ease the economic burden on airlines and/or generate new revenues.

Says AAAE's Dickerson, "My sense is that it has some economies of scale issues, so small airports may be looking at it. If there's a way to keep costs down [to airlines] by doing that, it's something people would explore."

NATA's Coyne, however, says he's concerned about the prospect of airports providing such services, which he maintains should remain with private sector firms. "It's a very hot topic among our members," he says. "It varies in different parts of the country, and it's always been an issue in New England."

Capital Needs, Bonds

Meanwhile, the capacity issues that faced airports in the summer of 2001 are returning. FAA projects that some $39.5 billion in infrastructure will be needed at U.S. airports through 2009. ACI-NA puts the number at closer to $50 billion.

Bonds, a primary funding mechanism for airports, are a hot topic of discussion in Congress currently as the Hill rethinks the alternative minimum tax (AMT). As Van Beek explains, AMT bonds remain attractive to airports because they are tax-exempt. In the end, the question to be answered, he says, is will airports be able to offer bonds that are attractive to investors. "Over time," he explains, "airports have tried to argue that we should get more of our debt as fully tax-exempt because [airports are] public utilities. It's a legislative effort we're pursuing."

Funding the System

With Congressional reauthorization for funding the aviation system now under discussion, and with reduced revenues in the Trust Fund, some are suggesting that what's needed is an overhaul of the tax base. Essentially, the system is currently funded via the airline ticket tax and the fuel excise tax on aircraft users.

Comments Chambers of Inter-VISTAS, "One of the most significant issues facing the industry is how to finance the FAA in the future. Much like the legacy airline model, the FAA funding model does not appear to be viable in the future."

Explains AAAE's Dickerson, "The [Trust Fund] surplus is disappearing quickly, so we won't have the flexibility and the uncommitted surplus when the taxes expire in 2007.

"I think there's a general agreement within the industry that being self-funded is important because then you're not competing with other governmental priorities. Now, saying that, how you get there is the controversial part."

Ed Bolen, president, National Business Aviation Association, agrees about it being a contentious issue, and maintains that the current tax system is equitable. "The current structure has been in place since 1970; it has worked pretty well. I think you would be hard-pressed to find a more effective tax than the fuel tax. It does a great job of measuring the use of the system - the larger the airplane, the more you pay because of the more fuel you burn."

Considering the Future of TSA

A topic of discussion in aviation circles today is the future of the Transportation Security Administration. Here are some thoughts from trade association reps.

In May, President Bush nominated Edmund 'Kip' Hawley, a technology consultant and a member of the Air Traffic Services Committee for the Federal Aviation Administration, to head up the TSA, succeeding Admiral David Stone, who announced his resignation in April.

Among the options being discussed for the agency are that it will remain as is; be absorbed into the Department of Homeland Security; or, be more or less disbanded with passenger screening functions being passed off to airports or private screening companies.

Spencer Dickerson, vice president with the American Association of Airport Executives, points out, "It's in current law that the DHS can get rid of the TSA." Dickerson considers it a viable option that TSA will be significantly reshaped in the months ahead, and possibly absorbed into DHS.

Comments Steve Van Beek, vice president with the Airports Council International-North America, "I think it will be an evolution, not a revolution."

Ed Bolen, president of the National Business Aviation Association, says that the nomination of Hawley to head up TSA indicates the Administration's commitment to keeping the agency in place. Says Bolen, "There was a large article in The Washington Post to that end [elimination of TSA]. The fact that the Administration has nominated Kip to head TSA indicates that's not entirely accurate. Kip is top-notch and close to the White House; he helped with the initial creation of TSA. I frankly would be surprised if he's being brought in to close it down."

James Coyne, president of the National Air Transportation Association, comments, "I think TSA will be around for a long time. The Administration and the Republican leaders in Congress feel that a bureaucratic monster was created and it was a mistake, but most accept that they're stuck with it. I think there will be some efforts to reign in some of the policymaking authority it has and bring that into DHS."

TWIC: Ongoing Development

SAFLINK Corporation (Nasdaq: SFLK) is a key technology provider to BearingPoint, the prime contractor for the U.S. Department of Homeland Security's Transportation Worker Identification Credential (TWIC) initiative. TWIC is the government's largest program designed to improve security at seaports, airports, rail, pipeline, trucking, and mass transit facilities by creating a nationwide credential to prevent unauthorized persons from gaining access to secure areas.

Under the auspices of the Transportation Security Administration, TWIC is currently in Phase III, the last phase prior to nationwide deployment, according to SAFLINK. In this phase, over 200,000 workers from maritime, rail, aviation, and ground modes of transportation have been issued a tamper-resistant, smart card-based credential that contains biometric information about the cardholder. Through this biometric data, each transportation facility can verify the identity of a worker and prevent unauthorized individuals from accessing secure areas. Approximately 36 test sites are now up and running across the country, primarily in the Los Angeles and Philadelphia areas as well as at Florida's deep-water ports.

When fully deployed, it's estimated that approximately 12 million TSA workers will participate in the TWIC program.